Market Analysis

working paper -- needs to be proofread

Subject: Is USDT ready for the GENIUS Act—or JPMorgan?

Your Challenge:
The GENIUS Act has set a ticking clock on compliance and transparency for stablecoins, and JPMorgan’s JPMD has just raised the stakes.

Your Risk:
USDT’s historical opacity means severe regulatory exposure and competitive vulnerability, threatening your dominant global position.

Your Opportunity:
There's a way to leverage regulatory frameworks outside U.S. jurisdiction, preserve your competitive advantage, and solidify USDT’s leadership position—without sacrificing what makes you successful.

Bottom Line:
Your next move could define USDT’s future. We have a strategy tailored for you—ready to explore it?

[👉 View the Strategic Memo]

MEMORANDUM OF LAW

Subject: AML/KYC and Reserve Compliance Requirements for Stablecoins Under the GENIUS Act

I. Clarification on Regulatory Scope

The GENIUS Act specifically pertains to stablecoin regulation within the United States, but effectively mandates requirements that align closely with international regulatory standards, such as those outlined by the Financial Action Task Force (FATF), the EU’s Markets in Crypto Assets Regulation (MiCA), and similar frameworks established by global financial regulators.

At its core, the GENIUS Act codifies two primary fiduciary obligations that are universally expected by regulatory authorities:

• Reserve Transparency and Adequacy: Ensuring the issuer's ability to meet redemption obligations through 100% reserve backing.

• AML/KYC Compliance: Rigorous Anti-Money Laundering (AML) and Know Your Customer (KYC) processes to ensure transaction integrity.

Given current global trends toward tighter financial regulation, the GENIUS Act provides a regulatory template that stablecoin issuers can reasonably expect to encounter internationally in the coming years.

II. AML/KYC Compliance (Existing Industry Practice)

Most reputable stablecoin issuers—including Circle (USDC), Paxos (USDP, PAXG, PYUSD, BUSD), and Gemini (GUSD)—already adhere rigorously to AML/KYC standards due to their integration into the regulated financial system and partnerships with licensed commercial banks or trust companies.

Typical AML/KYC Compliance Model:

• Stablecoin Issuer:

  • Manages reserve transparency, redemption assurances, customer relations, and oversees compliance broadly.

• Licensed Commercial Bank or Trust Partner:

  • Conducts customer identity verification (KYC), transaction monitoring, and regulatory reporting under the Bank Secrecy Act (BSA)/AML regulations.

  • Provides regulatory compliance infrastructure, data privacy, and cybersecurity standards.

Explicit Examples of Bank-Stablecoin Partnerships:

• USDC (Circle): AML/KYC compliance managed by regulated institutions including BNY Mellon and Cross River Bank.

• PAXG, USDP, PYUSD, BUSD (Paxos): Compliance managed via Paxos's regulated banking partners (e.g., DBS Bank in Singapore, and NYDFS-regulated U.S. banks).

• GUSD (Gemini): Managed through regulated NYDFS-approved trust banks.

• FDUSD (First Digital USD): Compliance managed through custodial banks regulated by MAS (Singapore) and HKMA (Hong Kong).

Notable Exception:

• USDT (Tether): Historically less transparent regarding its banking relationships and AML/KYC frameworks, prompting regulatory scrutiny and potential reputational risks.

III. Reserve-Backing and Transparency (New Differentiation Under GENIUS Act)

The GENIUS Act introduces stringent requirements for stablecoin issuers to demonstrate absolute reserve adequacy and transparency. Specifically, stablecoin reserves must exclusively consist of:

• U.S. dollars

• Short-term U.S. Treasury bills (maturity ≤93 days)

• Highly liquid money market funds

These reserves must be independently audited monthly, with mandatory public disclosures.

This requirement creates clear differentiation between:

Fully Compliant Issuers

Partially or Non-Compliant Issuers

USDC (Circle), USDP/PAXG (Paxos), GUSD (Gemini), PYUSD (PayPal)

USDT (Tether, historically opaque)

Transparent audits and reserve disclosure

Ambiguous reserve disclosures

High regulatory trust

Regulatory and reputational risk exposure

Implications of Enhanced Reserve Requirements:

• Investor Confidence: Investors likely will gravitate toward stablecoins with transparent reserve practices.

• Market Dynamics: Issuers with opaque practices (e.g., Tether) may face increased scrutiny or lose market share.

• Industry Consolidation: Regulatory clarity may consolidate stablecoin market dominance among already-compliant issuers.

IV. Potential Impact of GENIUS Act on Tether’s (USDT) Viability

Under the GENIUS Act, stablecoin issuers must transparently demonstrate complete reserve adequacy and accountability. Tether (USDT) historically has provided inconsistent disclosures regarding its reserve assets, frequently holding reserves in commercial paper, corporate debt, and other less-transparent instruments. This positions Tether directly at odds with GENIUS Act regulatory expectations.

Specific Problems Faced by Tether:

• Opaque Reserve Management:
  Historical ambiguity and infrequent disclosure of reserves contradict GENIUS Act transparency requirements.

• AML/KYC and Compliance Uncertainty:
  Historically unclear banking relationships and AML/KYC compliance practices exacerbate regulatory risk.

• Regulatory Enforcement Risk:
  Non-compliance risks include financial penalties, criminal charges, imprisonment, asset seizures, and possible operational shutdown.

• Market Confidence and Stability Risks:
  A rapid erosion of investor trust may trigger redemptions, liquidity crises, and overall market instability.

• Competitive Disadvantage:
  Compliant issuers (e.g., Circle, Paxos, Gemini) could leverage their regulatory adherence to attract investors, further isolating Tether commercially.

Bottom Line:

Without substantial and immediate measures to comply with GENIUS Act requirements, Tether faces critical regulatory, financial, and reputational risks, potentially jeopardizing its viability.

V. Market Implications of JPMorgan’s Stablecoin (JPMD)

The launch by JP Morgan of its deposit token, JPMD—issued as an institutional deposit representation on the Base Ethereum Layer‑2 blockchain—is a concrete reality, not a speculative concept. This development introduces JPMD as a major competitive threat: a tokenized liability backed by a major regulated U.S. bank with transparent reserves, potential deposit insurance eligibility, and a robust compliance infrastructure. This presents significant competitive pressure for USDC (Circle), GUSD (Gemini), and stablecoins issued by Paxos (e.g., USDP, PYUSD, BUSD, PAXG). However, it particularly threatens stablecoins with historical compliance and transparency concerns, most notably Tether (USDT).

JPMorgan's global reputation, stringent regulatory oversight, established banking infrastructure, and fully transparent reserve management practices significantly raise the industry standard for stablecoin reliability, transparency, and trust. Existing issuers now face intensified expectations from investors, regulators, and the broader market to meet or exceed these enhanced standards.

Key Competitive Factors Introduced by JPMD:

• Institutional Credibility:
  JPMorgan’s extensive, global financial services reputation and longstanding regulatory compliance history positions JPMD favorably for institutional adoption, potentially pulling investors away from incumbent stablecoins.

• Regulatory Compliance & AML/KYC Excellence:
  JPMD inherently benefits from JPMorgan’s robust and long-established regulatory compliance infrastructure, ensuring stringent AML/KYC adherence, precise transaction monitoring, and transparent reporting processes.

• Reserve Transparency and Stability:
  JPMD sets a clear benchmark by publicly demonstrating fully audited, 100% reserve backing through transparent disclosures of U.S. dollars, short-term Treasury holdings, or liquid cash equivalents.

• Market Adoption and Trust:
  JPMD’s launch shifts market expectations around trust and reliability, placing competitive pressure even on historically compliant issuers (USDC, GUSD) to enhance transparency and demonstrate clear differentiation from less compliant issuers.

Acute Risk for Tether (USDT):

Tether, given its historical opacity around reserve management and compliance practices, faces significantly elevated risks under this new market dynamic. Without swift and decisive action toward full compliance with GENIUS Act standards, Tether risks a catastrophic loss of investor and regulatory confidence, further exacerbated by JPMD’s entry into the market.

Bottom Line:

JPMorgan’s JPMD stablecoin redefines the competitive landscape, placing new expectations on stablecoin transparency, compliance, and reliability. While this impacts all existing stablecoins, Tether (USDT) faces uniquely severe consequences due to its historical compliance shortcomings. The competitive landscape has evolved sharply, intensifying the urgency for compliance and transparency across the entire stablecoin industry.

VI. Why Did USDT Remain Dominant Despite Predictions Favoring USDC?

From an End-User Perspective:

① Convertibility and Accessibility

• USDT is universally accepted across global crypto exchanges, providing deep liquidity. Users can quickly convert USDT into various cryptocurrencies or local fiat currencies, making it a superior store of value and medium of exchange.

• USDC, despite broad acceptance, remains significantly behind USDT in global markets, especially in regions less influenced by Western financial institutions (e.g., Asia, Latin America, Eastern Europe). Its market presence is more limited outside regulated jurisdictions.

② Transaction Costs and Speeds

• USDT runs efficiently on multiple low-cost blockchains, especially TRON (TRC-20), which became hugely popular due to extremely low transaction fees and rapid settlement.

• USDC historically prioritized Ethereum (ERC-20), incurring higher transaction fees and slower processing times, discouraging everyday use, especially among smaller-scale or frequent users.

③ Regulatory Environment (U.S. vs. Global)

• USDC is tightly regulated by U.S. authorities, imposing stringent AML/KYC compliance, increased costs, and greater administrative friction.

• USDT has operated in jurisdictions with lighter regulatory oversight, attracting users globally who prefer fewer compliance hurdles and who may distrust U.S. regulatory frameworks.

Additional Important Factor:

• Political and Regulatory Risk: Many global users, particularly in nations such as China and Russia, see cryptocurrencies—and stablecoins like USDT—as an alternative store of value compared to unstable or easily confiscable local currencies. These users prioritize reduced exposure to U.S. regulatory oversight, where assets have historically been frozen or restricted for geopolitical rather than purely criminal reasons.
  Thus, the fewer U.S.-imposed AML/KYC regulations, the more appealing the stablecoin.

Conclusion:

While early predictions suggested USDC would overtake USDT, these forecasts underestimated critical practical, operational, geopolitical, and psychological barriers. Although USDC is institutionally preferred and technically safer, USDT remains dominant because it aligns closely with the preferences and needs of global crypto end-users, especially those outside heavily regulated Western financial systems.

However, from a fundamental business-model perspective, USDT now faces a critical vulnerability due to the emergence of bank-issued stablecoins such as JPMD. JPMD directly provides the compliance, transparency, and regulatory trust previously supplied indirectly by stablecoin issuers like Tether. As regulated banks increasingly issue stablecoins, the intermediary role played by entities like Tether becomes redundant.

Indeed, the banks currently used by Tether as custodians of its reserves could themselves directly issue USD-redeemable stablecoins. Such bank-issued stablecoins would offer inherently stronger compliance frameworks, clearer regulatory oversight, and superior redeemability compared to intermediaries like Tether.

Thus, despite USDT’s current dominance, Tether’s long-term viability and competitive advantage face significant strategic threats, even if the full implications are not yet evident to all market participants.

An Offer USDT Could Refuse—but Probably Shouldn’t

Stablecoin issuers like Tether can significantly enhance their strategic positioning by leveraging local regulatory frameworks. Issuing stablecoins that fully comply with local AML/KYC standards, administered directly through locally chartered and regulated commercial banks, could replicate the trust, compliance, and ease-of-use traditionally associated with fiat currencies.

For example, a stablecoin issued in Singapore by a regulated Singaporean commercial bank would inherently comply with the country's AML/KYC regulations. In this scenario, the stablecoin would offer end-users and regulators clear compliance assurances, while Tether could focus on managing global custody arrangements and facilitating cross-border transfers.

Such a model represents more than just a regulatory compliance solution—it presents a distinct competitive advantage. Ignoring this strategic opportunity could be detrimental, particularly given the rapidly evolving competitive landscape shaped by bank-issued stablecoins such as JPMD.

Ultimately, either JPMD or USDT may emerge as the predominant international payment standard. However, USDT holds a critical advantage: it is not obligated to comply with U.S. AML/KYC regulations, provided transactions occur entirely outside of U.S. jurisdiction. Just as U.S. or EU AML/KYC laws do not apply to transactions involving the Chinese yuan or Russian ruble within their own jurisdictions, these regulations similarly would not apply to USD-denominated stablecoins issued by non-U.S. institutions operating outside the United States.

This regulatory flexibility currently represents USDT’s most significant—and perhaps only—competitive advantage compared to JPMD, USDC, and other stablecoins operating within stringent Western regulatory frameworks.

Fundamentally, what we’re saying, dear reader, is that the more heavily AML/KYC regulated the cryptocurrency, the less valuable it becomes to real-world end users. That’s a fact, and that’s the only reason why was USDT is twice the size of USDC. But let’s start from the beginning. All cryptocurrencies, not just stablecoins like USDT, USDC, JOMD, PAXG, and so on, but also Bitcoin, Ethereum, and other meme coins, like DOGE coin and any one of the other 23,000 cryptocurrencies, all of them have two use values — or utility: medium of exchange and store of value. While many individuals invest in bitcoin or Ethereum coin or other crypto currencies and use those of the story value this does not work with stable coins.